Edited version of private advice

Authorisation Number: 1052395340313

Date of advice: 14 May 2025

Ruling

Subject: GST - sale of property

Issue 1: Goods and Services Tax Issue

Question 1

Will the sale of the property A by person A be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore subject to GST?

Answer

Yes.

Issue 2: Income Tax

Question 2

Will person A share of proceeds from the proposed sale of property A be assessable on capital account under 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

If person A share of proceeds from the proposed sale of property A is reportable on capital account, is person A eligible to apply the main residence exemption to reduce the gain under section 118-110 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Person A and person B registered the partnership to carry on a business of property development.

The Partnership is registered for goods and services tax (GST).

The Partnership is a general partnership held in equal shares.

Person A and person B jointly purchased the property. This was your main residence.

The Partnership subdivided the property as part of an enterprise engaged in property development.

Following the subdivision, person A and person B's main residence became property B. No new dwelling was constructed for property B.

You continued to live in and nominated property B as your main residence until it was sold.

The Partnership entered into a contract with a builder for construction of properties on the subdivided lots.

The same builder was used for construction of each property and building commenced on all the properties concurrently.

Seven new dwellings were constructed on the on the remaining seven subdivided lots, and each property has different layout and features.

The subdivision and property development were funded through bank loans and personal funds.

You have since separated. Person A has been residing in one of the newly constructed properties and nominated it as Person A's main residence.

Person B has nominated another property as person B's main residence.

Person A is unable to remain in property A due to financial strain from the property development project.

The Partnership holds the title of the property A.

The certificate of occupancy for property A was issued and property A was advertised for sale.

The Partnership has claimed GST input tax credits on the construction costs associated with property A and has recorded property A as trading stock.

The Partnership accounts for all newly constructed properties on the revenue basis, consistent with carrying on a property development business.

The Partnership does not have a business plan.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 sub-section 40-75(1)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 118-110

Income Tax Assessment Act 1997 subsection 995-1

Reasons for decision

Issue 1: Goods and Services Tax Issue

Question 1

Will the sale of the property A by person A be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore subject to GST?

Summary

The sale of property A will be a taxable supply under section 9-5 of the GST Act. Therefore, the sale will be subject to GST.

Detailed reasoning

Under section 9-5 of the GST Act, a supply will be a taxable supply if:

   (a) you make the supply for consideration; and

   (b) the supply is made in the course or furtherance of an enterprise that you carry on; and

   (c) the supply is connected with Australia; and

   (d) you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The Partnership formed and registered for GST to carry on an enterprise for the purpose of carrying on a property development business. The property was subdivided. The Partnership accounts for all newly constructed properties on the revenue basis, consistent with carrying on a property development business. The Partnership has also claimed GST input tax credits on the construction costs associated with property A and has recorded property A as trading stock.

In your case, the supply of the property A will be:

   • made for consideration, satisfying paragraph 9-5(a),

   • made in the course or furtherance of this enterprise, satisfying paragraph 9-5(b),

   • situated in Australia, satisfying paragraph 9-5(c),

   • made when you were registered for GST at the time of supply, satisfying paragraph 9-5(d).

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively.

In your case, there are no provisions in the GST Act under which the sale of the property A would be GST-free.

Therefore, what remains to be determined is whether the sale of property A will be input taxed.

Sales of residential premises

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

   (a) commercial residential premises; or

   (b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Based on the facts provided, property A is residential premises to be used predominantly for residential accommodation.

The meaning of the term commercial residential premises is explained in section 195-1 of the GST Act. Paragraph 83 of Goods and Services Tax Ruling GSTR 2000/20 Goods and Services Tax: commercial residential premises provides a list of indicators for commercial residential premises.

Based on the definition and these indicators we do not consider property A to be commercial residential premises.

New residential premises are defined in subsection 40-75(1) of the GST Act to mean premises that:

   (a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

   (b) have been created through substantial renovations of a building; or

   (c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

In your case, construction on property A commenced on xxx. Person A nominated property A as person A's main place of residence. Property A has not previously been sold as residential premises nor has it been the subject of a long-term lease. Therefore, property A is considered a new residential premises as defined under subsection 40-75(1). The sale of the property A will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

As the sale of property A will neither be GST-free nor input taxed, the sale will be a taxable supply under section 9-5 of the GST Act. Accordingly, the sale will be subject to GST.

Issue 2: Income Tax

Question 2

Will person A's share of proceeds from the proposed sale of property A be assessable on capital account under 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Person A's share of the proceeds derived from the sale of property A will not constitute a mere realisation of a capital asset but will instead be treated as ordinary income assessable under section 6-5 of the ITAA 1997.

Detailed Reasoning

Section 6-5 of the ITAA 1997 provides that assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to arise in three ways:

   • as ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock

   • as ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated commercial transaction entered into by a non-business taxpayer outside the ordinary course of business, with a profit-making purpose

   • as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997 as a mere realisation of a capital asset.

Carrying on a business of property development

Section 995-1 of the ITAA 1997 states the term business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. The question of whether a business is being carried on is a question of fact and degree. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators should be considered in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

   • whether the activity has a significant commercial purpose or character

   • whether the taxpayer has more than just an intention to engage in business

   • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

   • whether there is regularity and repetition of the activity

   • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

   • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

   • the size, scale and permanency of the activity, and

   • whether the activity is better described as a hobby, a form of recreation or sporting activity.

Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour.

Isolated business transactions

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit-making purpose can be assessable income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refer to:

   (a)  those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

   (b) hose transactions entered into by non-business taxpayers.

Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are income and therefore assessable.

A profit from an isolated transaction will generally be income when:

   (a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

   (b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction.

Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.

TR 92/3 lists the following factors which are relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

   • the nature of the entity undertaking the operation or transaction;

   • the nature and scale of other activities undertaken by the taxpayer;

   • the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

   • the nature, scale and complexity of the operation or transaction;

   • the manner in which the operation or transaction was entered into or carried out;

   • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

   • if the transaction involves the acquisition and disposal of property, the nature of that property; and

   • the timing of the transaction and the various steps in the transaction.

Mere realisation of an asset

The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme, where the sale of the CGT is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. Section 102-5 of the ITAA 1997 includes a capital gain as assessable income.

A capital gain or capital loss may arise if a CGT event happens to a capital gains tax asset. Section 108-5 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

The most common CGT event is CGT event A1, and this occurs when an entity disposes of their ownership interest in an asset (section 104-10 of the ITAA 1997).

Application to your situation

In this case, the development involved significantly more than merely subdividing land; it encompassed a large-scale project with substantial planning and coordination, including the engagement of professional builders to construct 7 new dwellings. The partnership treated property A as trading stock and consistently claimed GST credits on construction costs, indicating the intent of carrying on a business of property development. The project was also financed through a combination of bank loans and personal funds, further supporting the commercial nature of the activity. These factors collectively demonstrate that the proceeds are revenue in nature, arising from a profit-making undertaking rather than a capital transaction.

Conclusion

On consideration of the facts and circumstances outlined above, we consider that the extent of development and improvements was so substantial that it cannot be regarded as a mere realisation of a capital asset by the Partnership, and it is considered that person A's share of the proceeds will be reportable as ordinary income, and not as a capital gain under section 104-10 of the ITAA 1997.

Question 3

If person A's share of proceeds from the proposed sale of property A is reportable on capital account, is person A eligible to apply the main residence exemption to reduce the gain under section 118-110 of the ITAA 1997?

Summary

The proceeds from the sale of property A are assessable as ordinary income. As the main residence exemption under section 118-110 of the ITAA 1997 applies solely to capital gains arising from CGT events, and not to amounts assessable as ordinary income under section 6-5, person A is not entitled to apply the main residence exemption to the proceeds of the sale.

Detailed Reasoning

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states the capital gain or loss you make in relation to a capital gains tax (CGT) asset that is a dwelling is disregarded if certain conditions are met. These conditions are that you must be an individual, 'the dwelling was your main residence throughout your ownership period', the dwelling is situated on less than two hectares, and the dwelling did not pass to you through a deceased estate.

Section 118-120 of the ITAA 1997 specifies that the main residence exemption can extend to adjacent land where:

   • the same CGT event happens to both the land and the dwelling

   • the land was 'used primarily for private or domestic purposes in association with the dwelling

   • the total combined area for the dwelling and adjacent land is less than two hectares.

Section 118-165 of the ITAA 1997 provides that the main residence exemption does not apply to the sale of land if the CGT event (the disposal) does not also happen in relation to the dwelling.

Application to your circumstances

The main residence exemption applies to a capital gain or loss made in relation to a CGT asset. As outlined in question 1, person A's share of proceeds of the sale of property A will be reportable as ordinary income, and not as a capital gain.

Consequently, person A is not eligible for the main residence exemption under section 118-110 of the ITAA 1997, as the proceeds, are not capital in nature.

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